Blame the media, China property edition

Blame the media, China property edition

David Keohane | May 07 11:07 | 7 comments Share

The bank that brought “adaptive pricing” to the China property euphemism table just two weeks ago is getting quite a bit blunter.

We’ll spare you more charts today, but here’s a chunk or two from Citi’s Oscar Choi and Marco Sze who have been forced into a shower of scare quotes by weaker than expected April data (emphasis in original):

A Powerful Loosening “Combo” now a MUST to Prevent a “Demand Cliff”: We believe the physical market has reached a critical point, with potential for broader- based demand shrinkage across different product-ends. Beside the recurring factors like tight credit, HPR [home purchase restrictions] policy, altered ASP [average selling price] expectations due to media reporting, etc, different to FY08/11, the downward pressure on demand is also intensified by new factors, like a weaker economy, RMB depreciation, anti- corruption, outflows of purchasing power to overseas, etc, We believe merely fine- tuning policy by the local gov’ts is insufficient to mitigate this potential correction…

June/July – Last Chance to Shoot the Silver Bullet: We believe a “nuclear” impact on economy and employment from any excessive slowdown of this mega- size market (est. total housing value at RMB130-160trn, annual RMB8trn property sales and RMB3-4trn land sales) is not affordable for government and society. To prevent the “demand cliff” and a big correction, we see June/July as the LAST chance for government to introduce powerful measures. Our current judgment is that nationwide volume should peak in FY15 (not FY14, even if it is more challenging than expected), based on the argument that the gov’t could still adopt powerful policy easing to restore buyer interest and a ST volume recovery. Missing this “deadline” could bring about a downward adjustment to our national assumption (sales up 8%, ASP up 2%) and an earlier-than-expected significant correction.

As to what that silver bullet represents…

1) HPR relaxation in majority cities

While HPR loosening is becoming a more widely-held view, some foreign investors wonder if the demand must necessarily turn up even if HPR measures are removed. The impact could be overstated, with demand being weaker than expected.

We agree of course that housing demand cannot rise for ever in China and, even if the home purchase restrictions are removed, demand may essentially show no growth. However, our argument is that a short-term boost can be expected, given many prospective homebuyers from suburban areas or those affluent groups looking to upgrade in prime cities are still there. Foreign investors may not be aware, but Chinese homebuyers can buy for longer-term “own-use”, which is not classified as investment demand even if they leave the unit idle.

Thus, we believe China’s basic housing demand should not be understated, in particular for provincial capital and prime cities that offer better medical services, education, employment opportunities and quality of life, where there should still be incremental demand in our view.

2) Credit easing with more favorable terms on downpayments and mortgage rates

We believe just loosening HPR is not sufficient. Central government still needs to rescue the market by pumping liquidity into the market. While this is a repeat of what has been done in the past and not being a favorable measure longer term as this creates more financial risk again, however, given credit in 1Q14 is abnormally tight, we believe see there is room to improve in 2Q and after, though we are not expecting too much given this also involves banks’ own financial risk management.

3) Restore buyers’ ASP expectations with less hostile media reporting

Beyond policy and credit loosening, we believe one of the most important (and yet also the most difficult to control) is buyers’ expectations on property prices, which is a key driver on the housing demand and key to change the “wait and see” stance. We believe a key to restore ASP expectations is fairer media reporting on the property sector without bias and hostility.

Solid thinking, particularly the blame the media gambit which would in no way be a short-term sop with dangerous longer term consequences. We hope the censors are on it.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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